ENGLISH NON-SDA
 
Supply and Demand

As we know 2015 had the “use it or lose it” rule for this particular claim year. As a result of this the most common discussions we have had this autumn have revolved around, how does the entitlement market work when the amount of eligible land matches the number of entitlements in the region? What creates the demand and supply? These conversations normally arise from the concept which is still prevalent in the market that there will be a shortage of entitlements for 2016 following the amount of entitlements that were confiscated in 2015. The question one wants to find the answer to is “how many entitlements are going to be confiscated in 2015?” Unfortunately it may be that we will never know this and certainly not for a while if we do. It is not certain whether in fact the RPA computer is programmed to be able to give such information. In our experience since 2005 by the end of trading, by and large, claimants seem to have sorted themselves out one way or the other either selling or buying the entitlements needed. This leaves one with the impression that everyone gets the entitlements they want, everyone sells them, the only variant being the price. Taking this theory further one therefore could assume all entitlements marry up perfectly with the land available every year.

In 2015 however this was certainly different with the introduction of the “use it or lose it” rule for that year and introduced the 5 hectare minimum claim rule. A lot of small lots of entitlements changed hands, those selling not having enough land or not being able to find more to make up the 5 hectares. Likewise there was a purposeful effort on those who had less than 5 hectares alternatively, who could acquire more land, to buy the additional small amounts of entitlements sold to make up their total to more than 5 hectares. In the end an interesting balance of supply and demand especially in the first window of trading in 2015. Then of course there was the larger claimant who had no problem with the 5 hectare rule who was threatened by the “use it or lose it” rule. These claimants would usually hold a “small pot” of unused entitlements which they would be able to retain unused by rotating them, to match up with future years of “eligible land” that became available to them. In likelihood the more active businesses renting land every year on short term arrangements with their claim every year never being exactly the same. The trade in 2015 towards even the end of the extended trading period saw sale prices go as low as £50 per hectare and by the end there were certainly entitlements not sold which were confiscated. Although this may not have been as dramatic as suspected, as prices towards the end did rise back up to just over the average sale price for the year at around £100/ha for English non-SDA.

The other factor, the quantum of which again we do not yet know is how many entitlements are then being taken out of the National Reserve and allocated to New and Young Farmers.

Effect of confiscated entitlements in 2015

This effect has now played out in the autumn market with interest in August at £190 an acre for English non-SDA leading to sales in September at £200/ha but then rapidly rising in October to an average of £240/ha. These were for medium to large size lots of entitlements ignoring higher prices sometimes achieved for small lot sizes. The  market was clear in that it felt that there would be a shortage of entitlements for 2016 and as historically since 2005 early buyers in entitlements would generally purchase these at subsequently lower prices on average than if they had left it until further into the trading period. These buyers were keen to acquire entitlements before the Basic Payment was to be made starting on the 1st December. This demand continued through November hitting £250/ha but on average ranging between £240 and £250/ha.

In the summer, we made a prediction that trading might reach £250/ha and such a strong start to the trading year at this stage hitting such levels is going to affect the market in the New Year when traditionally the quantity of trade increases leading up to the deadline, this year on the 16th May. Trying to predict how the year as a whole will run from here on one realistically has to ignore the 2015 claim year and go back first of all to 2014. The average English non-SDA was £230/ha for the whole trading period. Trade started at £190/ha but at the end of October dramatically rose on the announcement that Single Farm Payment entitlements would be rolled over into Basic Payment entitlements. Immediately prices hit £300/ha and remained there for two months but then gradually declined to end up the season again at £190/ha! This informs us that prices have the capacity perhaps to rise to £300/ha even though actual payment rates received have declined. We now know it is a near certainty, subject to seeing the first entitlement payment statements, the payment rates will be £178.85 per English non-SDA, £177.56 for English SDA and £46.91 for English Moorland. Therefore 2014 may provide the idea that vendors will obtain higher prices on and above £250/ha but also illustrates a threat of how a market  can behave when they dropped back down to where they started at £190/ha over the last three months of trading in 2014. Which will it be for 2016? What can we learn from 2013? The average price for the trading period was £218/ha for English non-SDA, starting at £200 and ending up at £230 with plenty of ups and downs in the mean time. The highest price reached that year was just over £250/ha. 2012 saw an average sale price of £230/ha, starting at £220 and generally rising to end at £240 with the highest price being £250.

Payment  rates versus demand and supply

Looking at the evidence from previous years’ payment rates have declined in real terms from 2012 being £209/ha, 2013 £219/ha, 2014 £195/ha and now as we know 2015 is £179/ha for English non-SDA. However the average price achieved during these years has not shown the same decline. Why not? The conclusion is that at these sorts of payment rates per hectare financially one should buy entitlements as the return, in comparison with nearly any other financial transaction or investment, is going to produce an unbeatable return. Therefore if one accepts that the payment rate does not affect the sale price, what does?

How long will the Basic Payment Scheme last?

Clearly towards the end of a scheme the entitlements should fall in value as they may have no worth if the scheme is not repeated. In England we saw from 2005 to 2012 the historic element reducing but the Flat Rate increasing to 100%. This distorted the evidence as to how the market would react towards the end of the scheme and in this case the scheme was continued for a further two years for 2013 and 2014. In 2012, in the then last year of the scheme, the average price was £230, when extended there was a dip in 2013 down to £218 and the 2014 year started at a reduced rate of £190. Although it then reacted to the announcement of the rollover of the scheme after three months it subsided back down again. Theoretically why would entitlements in their last year ever be worth more than what you are certain of receiving in that last year? (Although of course trading in any year is based, as nothing else is available, on the previous year’s payment rate.) So theoretically of course a declining scheme affects the sale price of entitlements as subsequently confirmation of its extension or rollover to something similar does the same in reverse.

Underlying all this however is the market’s assessment of the political likelihood of there being some form of subsidy for food production or agricultural activity and that if one scheme ends one will be a benefactor of the next scheme if one is already claiming and involved. This has been evidenced by the allocation of entitlements in 2005 and farming generally by the allocation of sheep, beef and milk quota. “Those that have will be given more.” The “joker in the pack” however at the moment of course is whether the UK remains in the EU and how the UK would support or not agriculture subsequently. At the moment this is not openly having an effect on the market. Maybe it will when we get closer to the vote.

Where does supply and demand come from?

After 2015 and supposedly a perfect balancing of “eligible area” to entitlements held in England why should there be a market at all for entitlements? Everyone has exactly what they should need. A fair question which in our opinion however in the circumstances following 2015 will create more movement of entitlements not less. Every year the market is affected by the same demand and supply with land going out of agriculture for development, forestry or the subdivision of land used for non-agricultural use now below the 5 ha or for those who either economically don’t want to be bothered with making a claim or are not interested. In 2015 and again also now in 2016 Common Rights has and no doubt will again see violent unexpected swings in demand and supply plus an allocation of extra entitlements. Surprisingly perhaps every year we find we are registering “virgin land” not claimed on before and always there remain farmers who do not wish and have not made a claim, still to avoid having to farm in the “RPA way”. There is again also the effect of farms changing hands where surprisingly this still produces an effect where in some cases the entitlements go in one direction and the land in another. The same applies to the rented section where in the autumn there is intense activity trying to establish the “market rate” so that the ingoer and outgoer can trade the entitlements between themselves without them going on to the open market. However logical in order to avoid a sale commission again a percentage ends up on the market where someone has been too greedy or thinks they can make more later on in the trading period or where both parties no longer want to deal with each other on anything other than what they have to. Therefore there is no reason why this year’s supply and demand will be any different with the same numbers of entitlements changing hands on the open market.

Decline in profitability and tightening of cash flow

Comparing this autumn’s trading with a “standard trading year” i.e. ignoring 2015, volumes have been up by 9% even with the shock decline in recent farm gate prices. Not only has this squeezed cash flow but of course also the uncertainty surrounding receipt of the Basic Payment. Our experience is that in previous years however there are few who do not find the money if they have eligible land at their disposal to buy the extra entitlements needed. There may be a delay in a purchase but ultimately it is made before the deadline. Therefore we could again see the last minute intensity of trading we saw in 2015 after Christmas. This squeeze on cash flow has however affected the market in the dying days of December and some vendors have broken ranks having wanted to sell before Christmas and have accepted offers, some as low as £220/ha for English non-SDA. It is perhaps too early to interpret this as a trend and is directly in relation to the reduced volume of trade in December which not surprisingly has been distracted by the oncoming early festive holidays of Christmas at the end of this week.

NAKED ACRES – HOSTING – RPA LEASING 2016

With claims of artificiality (not yet proved) increasing from the RPA in respect to naked acre letting and the risks involved with hosting we were pleased to see the RPA took the opportunity of introducing leasing with the launch of the Basic Payment Scheme. Whilst we did not recommend making use of this last year due to the chaos at the RPA and the subsequent risks involved with this, 2016 will now see the end of naked acre letting and hosting as we have known it. Where parties do not wish to sell or buy entitlements but have either excess eligible area or excess entitlements we will be offering, in the majority of cases, only an RPA leasing solution. Whilst there can be variants on this standard leasing scheme, as always, basically it will be similar to milk quota leasing where those with the entitlements will offer their excess in return for an upfront payment prior to exchange of contracts. The entitlements will be leased to the claimant who will be contractually bound to claim against the entitlements for that year and indeed all entitlements registered with them in order to comply with the new 2 year usage rule (the claimant must in one out of two years claim every entitlement registered with them in that particular year). It will be assumed that because of the “use it or lose it” rule that everyone complied with the new 2-year usage rule in 2015. (There is an interesting anomaly which may actually have no importance whereby one can submit a claim but not draw down on the actual entitlements. This may qualify under the usage rule.) The leased entitlements will have a return date which will automatically be used by the RPA and therefore eliminate the risks of losing the entitlements. However this may still remain, and can still only be contractually protected against whereby the lessee is not successful with their claim for all or part of their claim.

ENGLISH SDA AND MOORLAND

Entitlement values have experienced many changes since the introduction of the Single Farm Payment in 2005 with payment rates for Non SDA and Moorland ranging by up to £25 from year to year. These changes have been highlighted by the Rural Payments Agency’s (RPA) most recent announcement with regards to the 2015 entitlement values with a financial discipline mechanism confirmed at 1.393041%.  This announcement has confirmed that SDA payments have been increased by £13.68 from the 2014 payment, a percentage increase of 8.3%.  Similarly Moorland values have been increased massively by £24.71 on the previous (2014) year’s payment which represents an increase of 111.3% to the payment.

Historically the difference in entitlement value between Non-SDA, SDA and Moorland has been greater.  This is because the Common Agricultural Policy (CAP) was based upon high support prices.  Essentially this meant the more a farmer produced, the greater the benefit they would receive from the policy.  Through policy reform, the system in place today has decoupled the interrelationship between production and price. Despite this as a remanence of the initial scheme the English regions have taken into account production as a key decider on the value of entitlements.

Farmers and agricultural organisations alike have been pushing for the increase in SDA and moorland payments for a number of years.  It is believed that although farms in these regions are less productive than lowland farms, there are a number of significant environmental, economic and social factors that will benefit from an increased payment.  Many of the elements that make moorland farming less efficient and prolific than lowland areas would profit from an increased payment which could be used to invest in infrastructure and machinery.

In addition to the increase in entitlement values, demand for SDA and Moorland entitlements also has a major bearing on the price paid.  As they are less abundant that Non-SDA entitlements, often they can fetch a premium price due to their scarcity on the open market.

Therefore as a result of the increase in SDA and Moorland entitlement values, paired with high demand, the price of these entitlements has increased.  Since 2012 the average price Moorland entitlements have been purchased for has increased from £34 to £64 in just four years.  Similarly SDA entitlements increased in price from £209 to £260 in 2014.

This year we have traded Moorland entitlements at £75/ha and SDA at £240/ha. Although these prices are higher than previous years at the same point in the trading period,  the increased payment and the security of the scheme running to 2020 is likely to see these prices increasing after Christmas.

FARM FACTS

Our popular Farm Facts pocket handbook for 2016 has gone to press and if you would like to make sure you receive your copy this year please email us on office@townsendcharteredsurveyors.co.uk.

If you are thinking of buying or selling entitlements please contact Hugh Townsend for English non-SDA and Dominic Rees for SDA and Moorland, Welsh, Scottish and Northern Irish on 01392 823935.